A Critical Perspective On Development Economics

Author: Rahul Menon

In the midst of what might possibly be the worst recession since 2008, and staring down the barrel of overwhelming economic, social and human disaster, there is widespread recognition that increased welfare spending is critical not just to contain the fallout from the pandemic, but also to effectively combat it. By ensuring timely delivery of essentials and basic income support, one can minimise the chances of people venturing outside, and hence contain the spread of the COVID-19 virus.

There are valid concerns raised as to whether these measures go far enough in helping workers or whether institutional mechanisms will be able to convert announcements into genuine progress on the ground. This blog post analyses the arguments behind the justification of introducing welfare schemes in today’s times, and the underlying economic logic behind them.

The increase in welfare provision is sorely needed in a catastrophic situation such as the one we face. But while the readiness to deploy instruments to achieve this is unprecedented, the measures themselves are not. Much of the welfare measures rolled out by governments are standard income support and welfare packages, larger in scale but with no fundamental changes in their basic design. Much of these measures, moreover, have been advocated by many to deal with fallouts from economic crises in the past, only to be met with middling levels of success and acceptance by the powers that be. The impact of the coronavirus has shown us how quickly governments can turn over the fundamental principles of austerity if they are pushed to do so.

This post does not simply aim to criticise government policies of the past in light of current actions, but to outline a warning for the future. The problem of economic distress will not go away once the pandemic does, because then we will be dealing with battered economies, high unemployment, and weak to non-existent growth. In such times, when the threat of the virus has ebbed, there will be calls to roll back the welfare measures of the government. These calls will have to be countered stringently, on the grounds that the need to protect welfare and ensure government assistance is not contingent simply on the existence of a virus, but on the inability of the economic machine to provide for welfare.Read More »

Bradford deLong has recently argued that neoliberalism provides a way for former colonies to close the gaps with their erstwhile colonial masters. But this argument ignores the fact that several economic policies of colonial times were explicitly laissez-faire in nature.

The recognition of the dangers of allowing finance a free hand in the economy has led to a rethink of the soundness of neoliberalism as an economic and policy doctrine, from no less an organisation such as the IMF. Dani Rodrik has attacked the theoretical foundations of neoliberalism itself, judging that its insistence on allowing for unhindered market activity is bad economics itself, for economic models that make a theoretical case for markets cannot be easily transplanted into the real world in the way that advocates of neoliberalism believe.

Yet this is not to say that the concept is dead and buried. As Harvey (2007) points out, neoliberalism is a political economic process that ostensibly seeks to organise society and economies around the principle of free market activity, while primarily attempting to shift the balance of power towards dominant economic classes that control capital. Seen in this light, neoliberalism is still a powerful force shaping political and economic changes in much of the world today.

Bradford deLong’s blog post, first published in 1998 and re-published now shows that the term “neoliberalism” still carries intellectual currency. His is a curious argument; neoliberalism provides the only suitable path for countries of the developing world to close the gap with their former colonial powers. Access to the latest goods and technology allows developing economies – with low levels of productivity – to boost productivity and output growth, and consequently incomes. The reason the State should stay away from the economic sphere in the developing world is because democratic institutions have not been established yet, and hence the political sphere is vulnerable to capture by elites.Read More »

The concept of secular stagnation, first propounded by Alvin Hansen in the 1930s, has enjoyed an academic – and mainstream – resurrection thanks to Lawrence Summers (2014, 2016), who first advanced the theory as an explanation for the subdued recovery and anaemic growth prospects of advanced economies. A surprising criticism recently came from Joseph Stiglitz (August, 2018), who believes that the theory offers a convenient escape away from assuming responsibility for failed policy during the crisis. An acrimonious debate between Summers and Stiglitz followed.

On the face of it, Summers – and Gauti Eggertson – are right: the modern theory of secular stagnation does see a central and substantial role for fiscal policy. The problem, however, lies in the fact that a short-term fix for aggregate demand shortfalls – fiscal policy – is being advanced as a long-term solution of the problem of reduced growth prospects. The central question of what drives investment in a capitalist economy is not addressed.Read More »

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The Developing Economics blog takes critical approach to development economics. It seeks to stimulate debate and critical reflection on economic development among academics and practitioners from all relevant fields.